The Business of Healthy Snacking
From chips to chivdas, from biscuits to bakharwadis and from momos to murukku, Indians have always loved their snacks, let alone the festival specific snacks / farsan. However, off late people have been a bit more conscious of what they are eating and a whole new category of Healthy Snacking has evolved. Pivot from white bread to brown bread, increasing emphasis on consumption of oats / muesli /quinoa as a breakfast option and wider acceptance of products made of healthier ingredients including ragi, barley, etc. Direct-to-consumer (hereafter D2C) healthy snacking brands are on the rise given the increasing consumer demand. 25+ startups, c. USD 100 mm raised; and cumulative FY20 revenue of INR 4,500+ mm, prima-facie these are decent numbers. Direct to consumer as a concept is already seeing a lot of traction and it is a matter of time that D2C Companies in the healthy snack space start experiencing significant tailwinds. Furthermore, FMCG giants are also joining the healthy snacking bandwagon. Nestle is committed to cut salt by 10%, sugar by 6% and fat by 2.5% whereas Britannia stated that it would reduce sugar by 5% Key factors around the food business in India (or for that matter anywhere) are: Taste: Taste stills seems to be of paramount importance for Indians. Unless the brand appeals to the palate of its target consumers, it will remain sub-scale no matter what its provenance. For example, sour cream and onion may be the rage abroad but India still loves the “Chaat” type flavours. Price: Price is critical and options available are many. Indians can even now snack cheaply- how much does a serving of street-side bhelpuri cost after all? It is challenging to make a compelling case for a Rs 80/- packet of a snack-food when a burger is available for Rs 60/-. Place and form of consumption: How and where people are eating is a key change that is emerging as India navigates its way out of Covid. The food business in general is moving up the value chain – e.g., packaged pre-cut vegetables, processed meat, packaged idly dosa batter, pre-made rotis. Many of such changes have already gained large-scale traction- Zomato’s traction is a bellwether for one such evolution. There will be many more in the years to come as consumers evolve in the post-Covid world. Quite apart from evolution of the space where food is consumed there will be fundamental changes in the “how” of eating and we think this will lead to accelerating movement from “raw” food towards “ready-to-eat” in product offerings. For example, in the sweet-corn based snacks we are seeing a move from the simple “corn on the cob” towards spoonable cups as the customer preferences evolve. We are excited about the prospects of the food business in general and this category in particular. Our thoughts on what could be some differentiators that will help successful outcomes are: Price. The best snack-food companies in the world have a very narrow focus on the number of “trips to mouth” that each packet of snacks will allow. Behind this is the realization that “snacking” as a category will never substitute the primary meal. The felling of satisfaction from eating is thus largely psychological. The value proposition is hence critical as the eater should be left with a happy feeling about the quantity that they got for the money spent. This concept has implications on packs-sizing and pricing, to start with. Scale and profitability are both important. More than any other sector this one punishes poor unit economics. Simplicity in communication. Indian consumers know what they like to eat and are generally well-informed about food. The benefits must be clearly articulated to the consumers: for example, why is a Quinoa good for you? Simplicity in communication. Indian consumers know what they like to eat and are generally well-informed about food. The benefits must be clearly articulated to the consumers: for example, why is a Quinoa good for you? Acknowledge the challenge of fresh snacks. As mentioned above, it will be challenging to make a compelling case for a Rs 80/- packet of snacks when a freshly-put-together burger is available for Rs 60/-. A chole bhature or a masala dosa (in themselves a full meal) can cost even lesser. Hence brands must closely reflect on the premium that they can command for a “health” positioning. A key metric to watch out is the wastage percentage. Wastage measures the loss due to shelf-life or transit damage issues that occur before the end-consumers get the final product in their hands. The ability to achieve negligible wastage is a leading indicator of efficient and flexible supply chain efficiency. This brings us to the most important factor for success in a food company, namely a frugal mindset among those who run the business. Great operating efficiency, flexible supply chains and low cost/wastage is the result of a frugal mindset and achieving that is easier said than done particularly if the company is well-funded and looking to keep improving valuations. We think managing this dichotomy will be key to winning in the food business. Companies and managers have found innovative answers to all such and other question. Many start-ups and young companies are finding innovative and creative ways to further improve such outcomes, and winners will start emerging soon. A sample of the type of deals in this sector is as below: Some of the revenue multiples seem very rich – a sign of burgeoning interest in this sector. What comes next for the sector? Is taste still paramount for the Indian consumer? Are they willing to try other flavour profiles for better nutritional value? Are large numbers of consumers willing to pay more for health? Do companies need to increase their reach / presence beyond metro cities to tier-I and tier-II cities? Is it all just a matter of time that a ‘too-large-to-fail” enterprise emerges as given that most of the marquee investors are getting excited about this category? We would love to
Revenue Based Financing – a new alternate financing option for Indian SaaS entrepreneurs?
There has been recent buzz globally about a relatively new financing avenue, particularly for early stage Software-as-a-Service (SaaS) businesses. Popularly known as Revenue Based Financing (“RBF”), it entails an upfront financing into the company, while the repayments are a fixed percentage of the monthly revenue until a pre-agreed cumulative amount has been repaid. Specifically, this makes sense for SaaS businesses as their revenue is predictably recurring in nature. A recent Techcrunch post lists out the active financers in the space, and the typical RBF structures used by them. The average ranges for the criteria and key terms are as follows From a financer’s perspective, RBF presents itself as an asset class that has some of the upside of traditional VC, with some level of downside protection like debt. From an entrepreneur’s perspective, RBF is a non-dilutive financing avenue which can be closed relatively quickly. Illustrative IRR scenarios for a typical early stage SaaS company Let’s get down to the numbers to study the relative IRR performance of the three financing structures. We use the following assumptions: The IRR profile for various levels of company’s performance (measured by MRR growth %) looks as below The table below summarizes the pros and cons of the three financing structures for a financer and for an entrepreneur. RBF in India – an opportunity for both sides of the table RBF hasn’t made inroads into India yet. Based on our conversations with some of the active US based RBF financers, they are open to looking at India based SaaS opportunities as long as significant percentage of revenue comes from US based customers, and there is a US subsidiary which generates a certain minimum MRR. Looking at the pros and cons, while RBF may not be a panacea, it indeed looks like an option which the Indian SaaS entrepreneurs will look at with some interest.
Shareholder Agreement – practical primer
Most of the first-time entrepreneurs have valid questions and concerns around the Shareholder Agreement (“SHA”) in the context of any VC / PE funding. It is a legally binding document and would be the basis for any serious dispute resolution which remains unresolved via mutual deliberations and sometimes even after arbitration [if the SHA provides for arbitration as a dispute resolution mechanism]. Entrepreneurs agree to various covenants when raising VC / PE funds. After execution of the SHA, some of these aspects hardly ever become contentious e.g. Founder’s Lock-In, Employment Agreement, Information Rights, Right of First Refusal, Anti-Dilution Protection etc. Not to say “never”, but “hardly ever”. Most of the disputes involving the incoming fund investor and the founding team arise from items listed in the what is called “Super-majority” or “Veto” rights of the investor, & more particularly around one or more of the following aspects: Business Strategy, Future Fund Raise amount, timing & attendant terms, Corporate Governance and Exit. Business Strategy encompasses many facets including growth strategy, unit economics, hiring & compensation, change in scope of business (or “pivot”) et al. Corporate Governance is much in limelight in recent times given the controversies at Infosys, and hence perhaps needs no further explanation… except to add that there could be acts of clear dishonesty or misrepresentation which can also lead to serious disputes. When such serious disputes arise, any institutional fund makes every effort to find a workaround via mutual discussions, via interlocutors etc. They extend time windows to allow the founding team / management team a chance to set things right by taking corrective action. The fund teams seriously, seriously resist any arbitration process and completely hate having to go to courts. One might ask: what is their fear? It’s largely self interest… they know that Indian judicial system can take forever to give a ruling, and that too can keep getting contested all the way up to the Supreme Court depending on the enormity of what’s at stake. They also fear: (a) value erosion for their investment in the company while the legal proceedings take their course; (b) the severe drain on their bandwidth together with the uncertainty of legal expenses bill; & (c) the bad press for the fund and the fund team, which is bad for business overall. My advice to entrepreneurs – please have a balanced view wrt the SHA. Respect it and abide by the spirit of the SHA. But don’t dread it. Finally, it’s your word and commitment. As much as fund teams’, your future reputation as a credible entrepreneur and dependable business person is equally at stake if you cross the line.
I don’t need VC funding
There are quite a few entrepreneurs who say they do not need VC funding. At times, it is their considered view. At times, it is based on their sense of what VC funding entails, and primarily around poor experiences of VC-funded entrepreneurs where the business or relationship went south. It’s worthwhile sharing 2 beliefs of mine at this point: (1) outliers create better stories, both on the success and on the failure side; & (2) Failures create stronger biases than successes, on the margin. The fat middle is always forgotten! There is no gainsaying the awesomeness of a self-funded successful business. If one can create and maintain profitable market leadership without any external funding assistance, that’s a founding team worthy of serious admiration and emulation. We have enough and more such successes in India, some known & many unknown to the larger world. However, I come across many entrepreneurs whose businesses are profitable and they are happy to plough profits back into the business and continue growing organically. Hats off to them. However, I would leave them with some thoughts. One, the world is very dynamic. Your current success, profitability and market position is not to be taken for granted. Many businesses have seen erosion of their market position and profitability, very rapidly, because they were blind-sided by new market dynamics or by competitors who upped the ante, with or without external funding. Secondly, there is a time and place for everything. While organic growth is good, one needs to keep thinking about building and protecting market leadership, which is never guaranteed. It’s a well known fact that market leaders take a disproportionate share of the economic spoils. To build and maintain market leadership, besides many other ingredients, it is always good to have surplus financial resources at your command to move quickly and grab the opportunity, rather than wait for internal accruals … in which time the market opportunity might have vaporized. Having said the above, for the entrepreneurs who don’t care aggressively about leadership or profitability, have more modest ambitions and prefer peace & calm over daily guerilla battles, it is perfectly fine in saying “I don’t need VC funding”. But remember, if you are in business, your desired state of peace and calm is never fully in your control.
Who is the best-fit VC for my business?
I am often asked this question by entrepreneur friends when they have a choice amongst competing VC funds ready to fund their business, all other commercial terms being more or less equal. First, a universal truth – every VC becomes your friend and advocate if your business tracks well, and value creation continues to happen at a fast pace, post investment. They encourage, talk very well about you at every forum & go out of their way to help you by leveraging their knowledge and networks. However, this is something you don’t know a priori when you have to choose from amongst two or a few interested funds. At the point of deciding which VC fund to invite into your business, the key parameters to diligence out and evaluate are as follows: Brand / pedigree of the fund as an institution Fund’s past investments in your business sector / segment, and the implicit industry focus & insights it foretells Fund’s ability to write or syndicate the next larger cheque if you needed additional capital for the next level of scaling up Profile of the Partner from the fund who is going to take the lead on the investment in your business – past experience, years at the fund, personal chemistry et al Fund’s & Partner’s post-investment behavior with other portfolio companies – this would require speaking with the entrepreneurs of a few portfolio companies of theirs; choose to speak with a set of entrepreneurs … those whose businesses are doing well & also those whose businesses are not doing so great. Discussions with the latter is essential Naturally, if you are not facing the problem of plenty, the question about best-fit VC doesn’t arise – Beggars can’t be choosers!
Morbid Indian VC Musings?
The last decade has seen a lot of VC investing activity in India. Calendar 2015 particularly stood out with frenzied VC deal making. It led to a very strong perception that VC funding was available for any “good” business idea, & the definition of “good” became very elastic. Students coming out of colleges started favoring venturing over employment. Taking up a job after graduation / post graduation seemed to be for ‘dull’ folks. While the Indian entreprenerial spirit has gotten a boost, I get the feeling that it has also created 2 large silos of disgruntled entrepreneurs – those who tried and didn’t get any VC funding, & those who got initial VC funding but failed or are failing in their efforts to raise the next round from a new fund investor. Let me elaborate a bit. The entrepreneurs who ventured out, put in their savings [and their friends’ and family’s] and got some initial traction, always believed that VCs would be kicking their doors down to fund the next round basis the initial traction. This hope rested on what they saw happening around them. Nobody told them that VC funding can’t be taken for granted. Nor that VC funds’ investment preferences change as quickly as the weather in the Equatorial belt. Besides, in their wishful thinking, they would compare with one or more other ventures that had scooped VC funding with [in their wisdom] weaker business propositions or had lesser traction which in turn would strengthen their belief that VCs would queue up. When that didn’t happen, it left them disgruntled… enough to question the wisdom of VCs. VCs started looking “unsmart”. On the other hand, there is a growing legion of entrepreneurs who raised the first VC round, sometimes from more than one VC fund. They put their backs behind the investment thesis that they had sold [and the VCs had bought], & scaled their business rapidly. However, many of them took their eyes off the ball wrt profitability and business model viability. Initial assumptions in respect of the market opportunity and its immediacy failed to play out. As a result, they needed additional funding to pivot or re-engineer their business, including scaling down operations and scaling back on the growth momentum. After all, there was no point in chasing users / customers and revenues which would add to your burgeoning losses. To their dismay, when they looked at their existing VC backers for additional funding for the transition, they found them uncertain. Often times, the VCs gave them the message that they would be willing to co-invest ONLY if the entrepreneurs could find a new investor. Other times, they blankly refused to support any further…where it seemed to them that it would be good money after bad. This has created the second set of disgruntled entrepreneurs. My conjecture is that we will hear a lot of stories from such disgruntled entrepreneurs, adding to the pile which already exists and is easily found on the web and social media. 2017 might turn out to be a year when the benefits of VC participation in a venture’s growth trajectory [capital + multiple other value adds] could get drowned out in the flood of sob stories from the 2 sets of disgruntled entrepreneurs. This might make many entrepreneurs pause and think, about whether or not they want to raise VC funding. Those who have their backs against the wall will swallow the lump and do the VC rounds. Those who can manage with existing internal accruals by stepping down a bit from the growth accelerator, will perhaps refrain from going out to VCs or will be really, really selective … the best amongst these should be able to hang out a sign for the VCs saying “By Invite Only”.
India’s Core Strength: Independent Judiciary, Institutions & Regulators
I vividly remember an evening in a tent at Pangong Lake in Ladakh, when I had gone trekking with 3 other very close buddies more than 5 years back. Relaxing by the lakeside, the four of us ended up chatting up about this and that, and the highlight of the evening was a heated argument about the reforms and economic policies followed by China versus India, and how India was lagging far, far behind. The friend advocating China’s policies as the “better” way coincidentally happened to be working in a BFSI MNC and was based out of Singapore. I ended up batting for India. Among the many aspects we debated, my key points in favor of India were as follows: India is the world’s largest & functioning democracy – the word “largest” needs no definition. By “functioning”, my main point was that political transitions at Central and State levels have almost always happened without any disruption (i) even when the incoming political formation’s ideology was at the opposite end of the incumbent’s; & (ii) without any role being played by the military or any institution which could potentially take it upon itself to play kingmaker. Indian diversity is perhaps unmatched across the world – religion, caste, class, language, food, culture… you name it, and it exists. Yet, we mostly get along rather well. Again, without any government diktat or highhandedness. Mostly as a matter of choice that each one of us individually exercise every day. This uniqueness gets magnified when you consider the freedoms that we enjoy. India has been able to establish credible independent institutions, maintaining reasonably strong checks & balances. Most notable among them are the Supreme Court, Election Commission and the Reserve Bank of India (“RBI”). The Constitution and other enabling legislations under which these institutions have been set up are quite strong in themselves. Additionally, we have been blessed with a series of above-reproach forward-looking individuals who have led these institutions with aplomb and further strengthened the credibility of these institutions. The recent escalating war of words between senior government functionaries and the incumbent Chief Justice of India severely undermines the credibility of the Supreme Court, one of the most key pillars & watchdogs of Indian democracy. It’s not my place to apportion blame. However, any keen watcher of this unraveling saga should be concerned about what it portends. There may be a few shortcomings once in a while and there may be divergence of views at times. However, it is in no one’s interest to create a situation where the sanctity of Supreme Court and the people at its helm begins to take a knock in the public domain. Differences of opinion are but natural. In keeping with the stature of the institution in question, such differences must, and ONLY, be dealt with behind closed doors. These are not aspects which can be put to public vote, formal or informal. Who is to blame? Who should back off? No one can advise. One can only pray that better sense will prevail among the individuals who can direct what happens next, and that the public spat will be put to a stop expeditiously. If not, one of the main pillars of Indian democracy gets weakened and India loses credibility. That thought itself makes me very sad and fearful about the future.
Shareholders First
Enough said, and yet unclear – that’s what’s unfolding in the corporate group’s holding company’s boardroom that is catching everyone’s attention in India. Here are the only 3 things in descending importance that should form the basis for the behavior of the warring parties: Overall interest of all shareholders Majority shareholders’ wishes Brand / Reputation impact The one-who-doesn’t-want-to-go is strongly pitching that his decisions at the helm were in the best overall interest of all shareholders. And he & his family directly / indirectly are a significant minority shareholder – he has skin in the game & hence some credibility. The one-who-decided-to-intervene is citing erosion of Group’s Brand / Values, surely has the backing of the majority and believes that he too is acting in the best overall interest of all shareholders, mid- to long-term. The saga that is unfolding involves many leading names from the industry, academia & expert professional practitioners, and will engulf more as the ripples spread. No one can predict where things will head. However, 2 things are dead certain: Many outsiders will jump in, and fish in troubled waters for their own vested reasons, & Trust of the small shareholder in Corporate Governance, already weak, will erode tremendously given the historical stature of this specific corporate group and the muck that will be raked about the goings on in various boardrooms. Don’t the warring parties know this? Can’t they anticipate what is likely to follow? Would it not have been better if they had resolved their differences privately? Don’t they know that what’s unfolding is hurting the interest of all shareholders in the immediate term, and may be difficult to recover from even in the medium- to long-term? Yet, they did what they did. Even the best of us are finally humans. Expect to see more of the human foibles as big names take sides in this battle which will scar many reputations. Whoever wins, the small shareholder’s trust in corporate governance, and an implicit faith in the integrity of many stalwarts in various boardrooms, will be severely dented.
Enterprise Software Products – Big Clients, Big Opportunity
Over the past few years, there has been a lot of investment activity in the B2B Technology product space. One can broadly classify B2B Tech into two categories based on the size of the end clients, and the delivery model (on-premise or Cloud). Most of the recent investment activity in the B2B Tech space has primarily been in “SaaS”. This is because SaaS products are relatively easier to scale globally as against Enterprise Software products. Some of the drivers for this are as follows: That being said, we see a huge opportunity for Indian Enterprise Software product companies. The “edge” such companies have over typical SaaS companies are as follows: Only a handful of global players are fighting it out for the larger clients. For example, in case of Enterprise CRM, the primary competition is from Oracle Siebel, Microsoft Dynamics, Salesforce (for large enterprises that are comfortable with SaaS), and SAP. In case of Contact Center Software, it is from Avaya, Cisco, Aspect & Genesys. In contrast, for most SaaS products, the vendor market is quite cluttered since the barriers to entry (and exit) are much lesser for SaaS products. Incumbents in Enterprise Software are large (and relatively slow moving) firms with “legacy” products. Large enterprises have seen lesser innovation as compared to SMEs – immense opportunity to be nimble-footed and have a more contemporary product platform for the younger product companies in this space. Enterprise Software platforms are typically more comprehensive and feature-rich, whereas SaaS offerings are relatively more of “point” solutions. As a result, an Enterprise Software vendor has greater opportunities to expand and penetrate into adjacent add-on offerings, with great ease. Higher customer stability – typically much lesser churn, since the integrations and customizations are an ‘investment’ and provide stickiness to the vendor. India is a great place to start. Getting large Indian enterprises as customers and then expanding overseas (to other developing regions like South East Asia, Middle East and Africa) is a trend we keep seeing. While in developed markets, even large enterprises have adopted the Cloud infrastructure and software as integral to their businesses; in India the mid-to-large enterprises are still in the early-cycle of Cloud adoption. So if you are an Enterprise Software company, and are looking to raise funding, what are some key aspects from a VC fund raising perspective? Here are a few that we at Zanskar Advisors have learnt from our past engagements: Revenue Scale already achieved: The bars seem to be higher for Enterprise Software companies as compared to SaaS. For e.g. an Enterprise Software firm would need to have approximately $ 5 mm of revenue to attract similar amount of funding (for similar dilution) as a SaaS product firm can attract with say $ 2 mm (that too on an annualized run-rate basis). Established Partnerships (especially for overseas customer acquisition / servicing): As the “expansion” would be primarily coming from overseas, some instances of selling to overseas customers (preferably through channel partners – as direct sales are less scalable) will help. Instances of displacing established incumbents (large product companies) at key accounts (for reasons other than just the cost). Revenue Trends % of Product Revenue (License + AMC) as against Services revenue (upward trend is favorable) % Revenue from top x (say 5) clients (downward trend is favorable) % Revenue through Partners (upward trend is favorable) Average Revenue per Customer (an indicator of “upselling” – could be in terms of no. of users or no. of modules – upward trend is favorable) Global Recognition (from the likes of Gartner, Forrester etc.) is a plus We strongly believe that a new wave of Enterprise Software product companies from India is going to take on the world – in line with the thesis of “Make in India” (and sell globally).